Friday, October 31, 2014

Improving Consumer Confidence and 3.5% GDP Comes with a Warning

The economy took a jump from July to September as Gross Domestic Product (GDP) calculations rose 3.5%. This is great news for those hoping to finish off the last of the recession and move onto more prosperous times. This improvement is the largest in a single quarter since 2003 and parallels higher levels of consumer enthusiasm. Positive news also comes with a warning to redirect focus to balancing budgets, encouraging long-term economic growth, and reducing income disparity.  

To add to this positive news the University of Michigan’s consumer confidence index also jumped to 86.9 in October when compared to 84.6 in September.  With GDP expanding and consumer confidence rising few can argue that the world’s super power isn’t regaining economic ground. 

Measuring economic growth often rests on imperfect numbers such as GDP that can create improper assumptions among decision-makers. GDP is seen as the total market value of the goods and services produced by a nation over a certain period (Kolb, 2008). That number includes all final goods and services generated by economic resources within a nation. 

GDP product doesn’t consider the production of American citizens but any business or entity that works within a nation. It is an important distinction, as the global world can allow companies to do business within the U.S., but be owned by foreigners that still contributing to local growth.

Despite its wide reaching use GDP is not a perfect measurement. There is a fundamental difference between wealth creation and increased production. According to Strow & Strow (2013) GDP can encourage lawmakers to push for increased government spending but ignore wealth creation as a primary function of economic expansion. 

As an imperfect measurement the improvement of GDP and increasing consumer confidence are positive markers for the potential of future growth. Growth years are also times when the strategies of lawmakers and business leaders should also change to make such growth long lasting. Unfortunately, too many wait until another crisis occurs before refreshing their thinking.  

When the economy improves officials sometimes focus on maximizing additional spending to balance old budgets and encourage pet projects. With the ending of unprecedented government asset purchases, historic low inflation, and a few deficit improvements it is important to focus on reasonable budget reduction plans, improving economic trade conditions, and the reduction of income disparity. The underpinnings that lead to growth should not be ignored for short-term budget advantages.

Kolb, R. (2008). Gross Domestic Product (GDP). Encyclopedia of business ethics and society. 

Strow, B. & Strow, C. (2013). Gross actual product: why GDP fosters increased government spending and should be replaced. The Journal of Private Enterprise, 29 (1).

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